Typically, a high frequency trader would not hold a position open for
more than a few seconds. Empirical evidence reveals that the average
U.S. stock is held for 22 seconds.

And in a footnote it says

There even is a subcategory of high-frequency trading, Ultra-HFT,
which is sensitive to a latency down to the microsecond. Here,
co-location [of servers] is exceedingly significant, and shaving off
further microseconds is of utmost importance.

And no, the small guy can't play for reason well-put in the paper, co-location probably being the single most important one.

Because it's too expensive for the average joe.
–
ShaneFeb 8 '11 at 22:15

How much on average? Is it Insanely expensive or just expensive?
–
user40Feb 8 '11 at 23:37

+1 The Deutsche paper is very well written. Thanks for the link. BTW, I know smallish traders in the CBOT Building who are essentially co-located. It ain't cheap, but it doesn't cost an arm and a leg either.
–
pteetorFeb 9 '11 at 1:07

6

You can co-locate at NASDAQ, with some restrictions, for $1,000 / mo / 1U. It is possible to get the price down by being creative.
–
Louis MarascioSep 8 '11 at 17:44

A survey by FinAlternatives in 2009 concluded that "86% believe that the term “high-frequency trading” referred strictly to holding periods of only one day or less." (Aldridge 2009):

There are two problems with this survey for our present discussion: (1) the meaning of the term has been clarified significantly since that survey and (2) it surveyed a wide spectrum of people. This latter point isn't necessarily a problem, but it amounts to asking non-experts questions about a very esoteric field: you are bound to get a wide variance in the answers. High frequency trading is primarily a proprietary trading phenomenon (including when it is done by banks like Goldman Sachs), because its primary benefit is very high returns with low risk on a small amount of capital. Trading at high speeds is not a high-capacity strategy, so it is not as suitable to a hedge fund structure which is (a) fee-driven and (b) subject to client scrutiny.

Long story short: in order to have any meaning, HFT needs to mean something akin to latency arbitrage, in which case co-location and going as fast as possible are critical. This means different things depending on the asset class, strategy, etc. But firms like GETCO are making edits to their Linux distributions in order to get higher speeds: that's your competition.

My definition is not pretty, but it's practical: If you trade based on 5- or 10-minute bars, I call that high-frequency trading. If you trade based on tick-by-tick data, including bids and offers, I call that ultra-high frequency trading.

(Trading 1-minute bars is somewhere in between. Trading more slowly than 10-minute bars is "day trading".)

I make this distinction because the distribution of tick data is very different than the distribution of 5-minute bars. 5-minute bars behave like daily data or like the data from your Time Series Analysis class. In contrast, tick data is essentially an integer-valued process, occasionally moving by a tick or two but usually unchanged, generating data at incredible speed. Its distribution is very different and resembles a Poisson process -- nothing like a conventional time series.

The distinction also determines the required caliber of your network and computing gear. You need a very fast connection and a very fast computer to process tick data. A desktop computer with a broadband connection could process 5-minute bars.

Bottom line: trading tick data requires a fat pipe to the exchange, a blazingly fast computer, and a whole new data model. Trading 5-minute data is much more like conventional trading happening in real-time. That's a big difference.

For more about the distribution of tick data, I recommend Ruey Tsay's book or this excellent paper by Neil Shephard et al. Tsay calls it "transaction data". Shephard et al call it "low latency data".

Most folks doing "high-frequency" would consider trading on any form of "bar" to be slow. One might sample data as part of a model, but all high-frequency models are event driven and respond to the market event by event.
–
Louis MarascioSep 8 '11 at 17:45

@zeliboba: That other post says nothing about trading 5-minute bars. It's all about tick-by-tick. As far as I'm concerned, the technology for trading 5-minute bars is easily accessible to individuals... although perfecting a profitable strategy may be tricky. Tick-level trading, by contrast, is probably out of reach for all but the wealthiest individuals.
–
pteetorDec 3 '11 at 4:03

I'm wondering if you would care to update your answer. Could a new desktop computer with a broadband connection process 1-minute bars or tick data?
–
user5892Aug 8 '13 at 20:36

@fermat: Thanks for asking. Actually, I never said it could not handle 1-minute data... I just said that handling 1-minute data was "somewhere in between". I'll stick to that vague statement. Your actual success will depend upon the trading latency required by your trading algorithm. (And remember: your computer has gotten faster... but, then, so has everyone else's.)
–
pteetorAug 12 '13 at 1:47

To give some idea of the data volumes,
the Nasdaq TotalView ITCH feed, which
is every event in every instrument
traded on the Nasdaq, can have data
rates of 20+ gigabytes/day with spikes
of 3 megabytes/second or more. The
individual messages average about 20
bytes each so this means handling
100,000-200,000 messages per second
during high volume periods.

Doesn't speak to # of trades executed, but in terms of # of transactions analyzed by an HFT trading sytem in search of opportunistic trades...

my focus will be mainly on the
technical challenges I faced as the
engineering half of a two person HFT
startup, the business challenges, such
as acquiring trading capital and
negotiating ever-lower trading costs,
were similarly massive.

On the never-ending challenge for lower cost-per-trade:

Another problem, especially acute in
high frequency trading, is that the
cost per trade directly impacts the
profitability of a trading strategy
so, for a given per-trade cost,
strategies that would otherwise be
profitable are not. Clearing firms
will only provide a low per-trade cost
to customers that execute many trades,
but to execute many trades one needs a
low per-trade cost. So in addition to
the purely technical challenges,
building a HFT firm from scratch means
solving two chicken-and-egg problems,
that of building a track record and
that of negotiating a low per-trade
cost, simultaneously.

All three of your links are dead. Can you update them?
–
ZachApr 21 '11 at 19:24

2

It would appear after only a few blogs WK Selph is no longer blogging. In fact he's pulled down his blog completely hence the dead links. It would appear his posts have been posted at opensourcetrader.com/author/wk-selph though.
–
blcArmadilloMay 15 '11 at 6:17

The defining characteristic of "high-frequency" is not the number of trades, but instead it is the number of orders you place, and in particular how often you are changing those orders. The scratch rate (cancel/fill ratio) is often very high. For every 1,000 orders you place, you might get 5 fills. This is the single most defining criteria of whether someone is playing the HFT game.

The reason this is the defining criteria is because the type of edge being captured by the high-frequency players is fundamentally different than that of other market participants. Whether its micro-structure oriented or market making, the edge a HFT is trying to capture is typically very small and also very dependent on factors such as receiving a rebate, getting a fill on a specific exchange, or achieving the highest possible queue placement at a given price level.

Speed is important in almost all realms of intraday trading, but that doesn't mean you're a HFT. Being fast is important to intraday stat arb traders even if they hold their position for 4 hours. The reason is because their signal might hit 80% realization very quickly. The faster you can act the more edge you capture. That doesn't mean folks playing the stat arb game are HFT, they most certainly aren't. However, when viewed from the outside the layman often sees no difference.

That being said, any attempt to classify most firms will fail. Most do a mix of everything, but they all have their bread and butter.

To the question of whether a small guy can do it: yes you can. Can you do it on 25k? Probably not. Can you do it on 150-250k? Yes.

Can you summarize the contents of that paper in relation to the question? The abstract on SSRN doesn't seem to indicate what the OP is looking for. Also, links can be inlined in the text; just click the icon of a chain when you edit your answer. I mention this because I notice that you have non-inlined links in all of your other answers. I advise you to read existing posts on Stack Exchange to see how they're presented. Lastly, I notice you created two accounts, so I've merged them. Thanks, and welcome to Stack Exchange.
–
chrisaycockApr 16 '12 at 11:22

"Rules that attempt to force uniform prices at one moment
in time over geographically decentralized places must take into account the fact that
information does not move faster than light. At the same moment in time, two geographically
separated participants may observe two different “best” prices."